Shut-ins in oil industry to be much more material than 2015/16 downturn

Oil&Gas Materials 23 April 2020 17:18 (UTC +04:00)
Shut-ins in oil industry to be much more material than 2015/16 downturn

BAKU, Azerbaijan, April 23

By Leman Zeynalova - Trend:

Shut-ins in oil industry are expected to be much more material than the 2015/16 downturn, Trend reports citing Wood Mackenzie research and consulting company.

The company believes that further announcements and downward revisions are very likely.

“Asset economics are critical, but are not the only factor leading to production being shut-in. These decisions are complex and can take some time to reach. Most other options will be explored in the meantime, including negotiating with suppliers and lowering operating costs. Due to the complexities involved, the least economic production in an operator’s portfolio may not be the production that is ultimately shut-in,” reads the analysis published by Wood Mackenzie.

The company looks at 10 factors that influence upstream shut-in decisions

1. Corporate-level impacts are key. These include potential financial hedges, pipeline/supply commitments, Reserve Based Lending (RBL) borrowing bases, service contracts, contribution to central overheads, corporate cash positions, debt repayment obligations, and portfolio balance decisions.

2. The operational costs of shut-in can be high. Equipment rental charges and the cost of preserving equipment can deter shuttering of production. Onshore, where decisions could be made well-by-well, decisions are often made at the field level to prevent shifting fixed opex burden to smaller group of wells.

3. Egress or physical storage limitation issues can force shut-ins if tankage capacity cannot absorb excess supply, and can cause steady-state price differentials to vary widely.

4. Supply chain where niche or regional providers would be key to restoring production, operators may choose to continue operations.

5. Facilities and pipeline concerns mothballing equipment can lead to numerous operational issues on restart, including corrosion, blockages and leaks.

6. Contractual and legal considerations, including fixed royalty clauses, must-produce obligations, take-away capacity agreements etc.

7. Governments or National Oil Companies may prioritise security of supply, making shut-in of production difficult without damaging stakeholder relationships.

8. Partner consent is needed for many project consortiums; sometimes unanimous support is required.

9. Restart costs: wells with high water cut and no gas support will likely require intervention to de-water the wells and restore production. For more mature assets, shut-ins can incur restart capital and accelerate abandonment liabilities.

10. Reservoir performance: some wells will actually benefit from a period of shut-in and re-pressuring, depending on duration. But the long-term viability of others could be jeopardised.


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